BLOG
In a Retirement Transfer, Who Handles What?
Different people or organizations cover many steps in a retirement transfer.
As you will read below, the parties are responsible for most steps. However, that responsibility can be delegated to the party’s attorney or the retirement order drafting attorney if they choose. The most important part of each of these steps is making sure it is clear who is taking the responsibility. While the blame belongs to both parties to follow through on getting the retirement order drafted and submitted (if not agreed otherwise), which one, in particular, must be proactive to start the process and make sure to see it through to completion?
It is best practice to state the responsibility clearly in any settlement agreement or have the judge designate one party to be responsible for the retirement order process in an order.
So, how does it happen, and who is responsible for each step?
Figure out the division of the retirement asset. The parties are responsible for this or for taking the matter to court and requiring the Court to order a division.
Have the Retirement Order prepared. The parties are responsible for hiring an attorney to prepare the retirement order and providing all necessary information. Such information includes the document that explains the asset division, a statement from the account that will be divided, and sometimes a letter or additional information from the account being divided. In best practices, the order is prepared while the parties negotiate their agreement or immediately following the divorce. All information the drafting attorney needs would be gathered in discovery or informal document exchange. The parties should agree on which is responsible for hiring the attorney or if it will be a neutral/joint representation.
Paying for the Retirement Order to be prepared. The parties are responsible for determining how the drafting attorney will be paid.
Signing the Retirement Order. The parties are responsible for signing the retirement order, or they may have their counsel sign on their behalf if appropriate in their jurisdiction.
Submitting the retirement order to the Court. The judge must sign the retirement order. The parties or their counsel are responsible for submitting the order to the Court.
Obtain Certified Copies from the Court and mail them to the Plan. Plans require that certified copies, or true test copies, be submitted. These special copies come with a seal from the Clerk of the Court to certify that the order is a true representation of the order the Court has entered. The parties are responsible for determining who will be responsible for this step. It could be a party, their counsel, or the attorney who drafted the QDRO.
Respond to the Plan’s questions. The parties are responsible for answering any questions posed by the Plan in a timely manner. This may include but is not limited to, the person receiving the funds being responsible for filling out forms to notify the plan of where they would like their funds sent.
Figuring out where the funds should be sent. This is for the party receiving the funds. Perhaps it is worth a conversation with a financial planner to figure out what type of account should the funds be rolled into, or should some of the funds be taken as cash and the rest rolled over? This is not a decision that an attorney can make on the party’s behalf.
Transferring the funds. The plan administrator will notify the plan’s financial institution when the retirement order is approved and instruct them to transfer the funds. The financial institutions will then coordinate to transfer the funds to the receiving party’s account. This transaction may also involve the party’s financial advisor, depending on the type of account the funds are being transferred to. The attorneys do not have access to the accounts or the fund transfer. The parties have the most access to check up on the status of the transfer because they already have access to their own accounts. The financial institutions view attorneys as third parties and typically need the account holder’s social security number, date of birth, and address to get any information if they get any at all. Some institutions require that the account holder be on the phone to share the status of the transfer.
Depending on how quickly the financial institutions and courts are processing and how quickly the parties provide information to the drafting attorney, this process can be as quick as 2-3 months or can take much longer.
If you have additional questions regarding your retirement order, or need assistance contact our office at 240-396-4373.
What is the Marital Share Formula and How Does It Work?
When dividing a pension many times the division is described as a formula, which is defined as, some percent times a fraction, in which the numerator of the fraction is the total number of months of creditable service in the retirement plan earned during the marriage and the denominator is the total number of months of creditable service in the retirement plan earned as of the date of retirement. Some jurisdictions call this the “coverture fraction.”
For those who are not currently using algebra terms in their daily language, the numerator is the top number in a fraction and the denominator is the bottom number in the fraction. When the numerator is divided into the denominator the result is a percent (or quotient for those being technical, but for the purposes of the marital share fraction, it’s a percent).
And, for those that need a numerical example, let’s say a person works 120 months at a job earning credit in the retirement system, and during that time, they were married to their spouse for 60 months. The fraction would be 60 / 120 = 50%. Therefore, 50% of the pension is marital, and 50% is non-marital. In a divorce circumstance, typically only the marital portion is being divided, so the participant would retain their 50% non-marital portion for themselves, and the 50% marital portion would be available to divide with the former spouse.
What about the common scenario where the person who has the pension is still working for that employer, earning new credit in the retirement system after the marriage, how does this formula account for that?
The way the court order is drafted is by using the definition of the fraction underlined in the first paragraph. This language allows the retirement plan to be responsible for doing the math when the participant retires. While the numerator can be determined as of the date of marriage, the denominator won’t be. Therefore, the retirement plan will use the instructions in the QDRO when the participant retires, when the information is known.
Going back to the 60 / 120 scenario. Let’s say the participant continues to work for this employer another 120 months after the divorce. Now the fraction is 60 / 240, or 25% is marital. The definition of the fraction being provided to the retirement plan is what allows for the plan to properly account for the former spouse’s share as of the date of retirement, which usually is not known as of the divorce.
But wait, that math seems to highly benefit the participant. Why would a former spouse agree to this?
The marital share fraction, once reduced to a percent is multiplied by the total benefit earned by the participant. The total benefit earned by the participant is typically calculated using some combination of the length of the employment and the highest or final salary earned. For participants who continue to work after the date of divorce, that means they are working toward a larger retirement benefit.
For former spouses, this means that while the marital percent of the benefit may be decreasing as the participant continues to work after the divorce, the benefit that the marital percent is multiplied by is larger due to increased time spent earning credit in the pension system and a larger salary that is used to compute the participant’s total benefit.
So the way to think about it is that if the benefit is calculated at the time of the divorce, the former spouse may be receiving a larger share of a smaller benefit, however, when the calculation is redone at the time the participant retires, the former spouse is receiving a smaller share of a larger benefit. Proportionally, the math works out to limit the benefit payment to the former spouse to amount attributable to the marriage.
Many states have their own version of this formula. Some call it the marital share formula, others refer to it based on the case in which the formula was adopted. For example in Maryland it is referred to as the Bangs formula. This is one way to calculate the former spouse’s interest in a pension due to a divorce. Depending on the circumstances this might not be the appropriate method to divide the pension. It is best to discuss the options with your local divorce counsel.
It is also important to keep in mind that some plans will place a limit on the amount that can be awarded to a former spouse. Specifically, the military limits it to the benefit the member has earned as of the date of divorce, so that all of the increased service time and promotion benefits are retained solely by the member. In such cases, it is important to alter the fraction as described above so that the denominator does not continue to increase. Alternatively, the International Monetary Fund limits the benefit awarded to the former spouse to be 50% of the marital share. Thus, if the parties wanted to award a larger percent to the former spouse say to offset for a different marital property, they would not be able to award the former spouse something like 65% of the marital share of the pension because of the plan’s limitations.
Dealing with pensions and retirement assets can be difficult, and knowing the plan’s rules as well as your state’s rules with respect thereto is key to a successful negotiation. If you’re looking for help dealing with a retirement plan or understanding the plan’s rules, please call us at 240-396-4373 or email us at qdro@markhamlegal.com to see if we can help.
Division of Retirement Assets in a Divorce: Ask for What You Want - Be Precise
Growing up, many people hear, “You can’t get something if you don’t ask for it,” to learn to be more assertive rather than just accepting what life gives them. The same can be said for the division of retirement assets in a divorce. Each state has statutes and rules that may be the default for the division, and each plan may have further default rules for the division of such assets. But that’s exactly what those rules and statutes are – defaults in case the parties do not agree to something else.
Why is it Important to Know the Default Rules?
Sometimes, the default rules might be exactly what the party wants to happen. In this case, asking for something else does not make much sense. To know this, one must know the default rules. If your attorney is unfamiliar with them, it may be time to hire an expert to consult on the matter to ensure you’re doing the right thing.
What’s a situation in which the default rule might be what the parties want to do? Let’s say the parties agree that alimony shall be paid from a pension that’s already being paid out. Alimony payments typically do not get adjusted with cost-of-living adjustments. Most pension plans have a default rule that if the payment amount to the alternate payee (former spouse) is described as a dollar amount per month, then no cost-of-living adjustments will be applied, and the alternate payee will continue to be paid that dollar amount until the plan participant’s death (or the QDRO is vacated). In this case, the default rule is likely what the parties wish to occur.
If pension division language is described as a percent of the monthly payments or by a marital share formula/fraction, many plans have default rules that cost-of-living adjustments will also be divided in such fashion. How does this impact the alimony situation? If the parties intend that the alternate payee receive $2,000 per month, without the cost-of-living adjustments, but decide to phrase it as X% of the participant’s pension payment per month, then pension plan may interpret that to include the cost-of-living adjustments.
While cost of living adjustments are not much each year, over the lifetime of a pension, it can amount to hundreds or thousands of dollars a year, which does make a difference.
While this is undoubtedly an area where parties with more sophistication can try to use the default rules to their benefit, it’s better to keep transparency and negotiate in the open. Does the alternate payee want cost of living adjustments? Ask for them. Does the alternate payee want a survivor benefit? Ask for it. Does the pension plan participant want the alternate payee to pay for the survivor benefit? Ask for it.
What are the Consequences of Vague Language in a QDRO?
As a person preparing QDROs for pro se parties and attorneys alike, one of the hardest things we have to tell clients is that even though they have an agreement or went to court and have a judgment of divorce, they aren’t done figuring out the division of marital assets because some aspects of the retirement division are not described.
Why is this so hard? Because typically, by the time someone gets their QDRO drafted, they think they are at the end of the divorce road and can limit their contact with their former spouse. It can be emotionally rough on those parties when we tell them to go back to the negotiating table to figure out a few more things.
How can people be sure to address all issues in advance? Ideally, reach out to the retirement plan during negotiation or before trial, and be sure to know all elements of the plan that can be divided in the divorce. Then, ask for the division scheme your client wants.
What if you can’t reach the plan in time before the agreement needs to be signed or the trial in the matter?
Here’s a list of the most common terms that should be addressed in a QDRO for a defined contribution plan (401k, 403b, 457b, TSP plans, etc.):
Plan Name
Transfer amount
Valuation date
Market/investment experience
Payment of the Plan Administrator’s fee to review and implement the QDRO
And here’s a list of the most common terms that should be addressed in a QDRO for a defined contribution plan (pension, annuity type):
Standard pension
Pre-retirement survivor benefit
Post-retirement survivor benefit
Refund of contributions
Cost of living adjustments
Early retirement subsidies
Disability benefits
Shared or Separate Interest division
Note that these are only the most common terms for each list above and do not apply to all plans. It is best practice to get the information specific to the plans involved in your case and work directly with the plan. Most notably, some plans do not even accept QDROs or do not allow survivor benefits to a former spouse, so especially in those circumstances, it is important for your client’s future planning to make an effort to deal with the case-specific information. If you need assistance dividing retirement assets in your case, you call us at 240-396-4373 or email us at qdro@markhamlegal.com to see how we can work with you to serve your clients best.
What is the “Marital Share” of a retirement account?
While seemingly a simple question, this is quite loaded and entirely depends on the jurisdiction of the divorce.
When did the marriage start?
The one thing most jurisdictions seem to agree on is that the marital share starts to accrue on the date of marriage. So what is the date of marriage? For some couples, it is simply the wedding date. What about for couples who were in a domestic partnership first, and then married? That’s a question specific to the jurisdiction. Some automatically merge the time of the domestic partnership with the marriage which would make the marriage start at the beginning of the domestic partnership. Some jurisdictions terminate the domestic partnership at the start of the marriage, meaning there are two distinct relationship types this couple has entered into, but that the marriage is second and not “backdated” to the beginning of the domestic partnership.
Another circumstance that might not have a clear date on which the marriage began is a common law marriage. While the parties might agree that all of the legal elements have been satisfied to create a common law marriage, they might disagree on when all those elements were satisfied.
When is the termination date for the accrual of marital assets?
Jurisdictions differ as to when they terminate the accrual of marital assets. As an example, Maryland terminates the accrual of marital assets as of the date of divorce unless good cause is shown otherwise or another date is agreed to by the parties. Across the river, Virginia terminates the accrual of marital assets as of the date of separation unless good cause is shown otherwise or another date is agreed to by the parties. Parties can separate months or years before the divorce becomes final, so depending on where the divorce occurs will dictate whether the retirement contributions being made during the separation period are marital or separate.
What about the interest accrued on my pre-marital retirement balance?
Many times parties are working for an employer before the marriage and continue that employment during the marriage. For some, the pre-marital retirement balance is substantial. Therefore, the interest earned thereon throughout the marriage could also be substantial. If that account were separate and not touched during the marriage, it is typically clear that the pre-marital account and all interest thereon, would be separate property. The issue is not as clear when the account becomes co-mingled during the marriage.
One question is who would be responsible for tracing out the interest earned on the pre-marital balance? Typically, the party making the claim that the funds are non-marital has such burden. They could hire an expert to do that tracing. It all depends on the exact circumstances of the case and is a conversation that should be had with one’s attorney. An estimate or approximation could be used in lieu of a full tracing, if the party does not want to hire an expert to trace every penny.
Another question is how has the market performed since the marriage, and is it worth it to do the tracing? If it was a shorter marriage during a volatile period or downturn in the market, perhaps asking for the market experience on the pre-marital balance is actually a detriment to the account holder. Again, some jurisdictions require the tracing of the investment experience, so for some parties it may not be an option whether the tracing should happen. However, in jurisdictions where the law is not clear these are issues worth consideration before making claims.
What if a loan is outstanding against the retirement account?
If a loan is taken out against the retirement account, it is typically viewed as an asset of the account and may or may not be included in the account’s “total balance” as reported on the account statement. So, that means when determining the “marital share” the parties must determine whether the outstanding loan balance will be included or excluded. Some jurisdictions have laws and cases to handle this situation. Others do not. In jurisdictions that do not have laws and cases on point, some of the considerations include why was the loan taken out? If it was used solely by the party who owns the account, perhaps it makes sense that the other party’s share is not impacted by the outstanding loan balance. If, however, it was used for joint, marital purposes, perhaps the other party’s share should be impacted by such loan. For jurisdictions without laws or cases on the issue it is quite case and fact specific and can be a point of contention in negotiations.
How does all this relate to my QDRO?
Many times, retirement plan administrators suggest dividing the “marital share” of the retirement account, and parties will agree or be court ordered to divide the “marital share” of retirement interests. To be sure, the proper amount of funds is being transferred to the former spouse, it is important to properly define the “marital share.” This can be done by providing a formula or doing out the math to determine a specific dollar amount or percent of the account to be transferred. Some plan administrators may allow a formula, others may not. Markham Law Firm can help figure out how the information can be phrased to the plan administrator, and if in a jurisdiction where we do not practice, can work with your local counsel to prepare an acceptable QDRO that complies with your state’s definition of “marital share.”
Have additional questions, or want us to help with your QDRO? Contact us at qdro@markhamlegal.com or 240-396-4373.
What is a “pre-retirement lump sum” benefit, and can I get one in my divorce?
A pre-retirement lump sum benefit is available from most pension plans. Outside the divorce context, it is paid to a designated beneficiary or current spouse in the event that the pension plan participant dies before they retire and begin to receive benefits from the pension plan. Whether the pre-retirement lump sum benefit (outside the divorce context) can be paid to a designated beneficiary or must be paid to a current spouse is determined by plan rules and federal law. In the divorce context, most plans allow for a Qualified Domestic Relations Order (QDRO) or other, similar order, to supersede the beneficiary designation or plan rules requiring the payment to a current spouse, to allow for a payment to a former spouse.
How is the amount of the pre-retirement lump sum benefit determined?
While the participant is employed, they may be making contributions to the pension plan. In addition, the employer is likely making contributions to the pension plan on the participant’s behalf. These two amounts, as well as interest earned thereon, are usually combined to make up the pre-retirement lump-sum benefit amount.
How is the pre-retirement lump sum benefit treated in a divorce?
Most plans allow for a QDRO to specify whether all or a portion thereof should be paid to the former spouse (alternate payee) in the event that the participant dies prior to beginning their retirement benefit from the plan. Therefore, it is important that during the negotiation of any settlement agreement or argument in court that the former spouse (alternate payee) include a request for the portion of the pre-retirement lump sum benefit they desire.
How much of the pre-retirement lump sum benefit can I receive?
A former spouse (alternate payee) can receive up to 100% of the pre-retirement lump sum benefit. Typically, however, a former spouse (alternate payee) would receive 50% of the amount earned during the marriage. For example, if the participant was participating in this pension plan for half (50%) of the marriage, then the former spouse’s (alternate payee’s) benefit would be 50% of 50% of the benefit, or 25% of the total benefit. However, pension plans will typically accept any percentage or easily followed formula that the parties agree upon (or is awarded by the court).
How much of the pre-retirement lump sum can I preserve for a potential future spouse or other beneficiary?
A former spouse (alternate payee) can receive as little as 0% of the pre-retirement lump sum benefit. As stated above, a typical division would award the former spouse (alternate payee) 50% of the amount earned during the marriage. If this is the case, then any additional amount could be available for a potential future spouse or other beneficiary. Some plans may allow for only one person to receive this benefit, however. So, it is important to research whether this is a plan rule – if that is the case, then if the former spouse (alternate payee) receives any part of the pre-retirement lump sum benefit then the remainder would not be available for a potential future spouse or other beneficiary.
Can a Court award the pre-retirement lump sum benefit?
If the participant’s interest in the pension was earned during the marriage and the regular pension retirement benefit is divisible by the court, then it is likely that the pre-retirement lump-sum benefit is also divisible by the Court. However, it is important to consult with an attorney licensed in your state and experienced in family law to be sure for your specific case.
What happens to these contributions by the participant and the employer if the participant does not die before beginning to receive retirement benefits from the pension plan?
In such an event, the contributions from the participant and employer, and any interest earned thereon, are paid out over time as a part of the regular pension payments. In the event that the participant dies after beginning to receive retirement benefits but before all contributions are paid out, the contributions will be used to fund part of the post-retirement survivor annuity. If no one is designated to receive a post-retirement survivor annuity, the contributions will be paid out in lump sum to the designated beneficiary.
What’s the difference between a “former spouse” and “alternate payee”?
These are both terms of art that tend to be used loosely. However, they both mean the former spouse of a pension plan participant who is entitled to receive a share of the participant’s interest in the pension plan. The reason for the two terms is that “alternate payee” is preferred for plans that are governed by the Employee Retirement Income Security Act (ERISA), as amended and “former spouse” if preferred for plans that are not governed by ERISA.
Disclaimer: Each pension plan is different and may accumulate the pre-retirement lump sum benefit differently or may treat its division differently in a divorce. It is important to research the pension plan in your case to make sure that 1) the pre-retirement lump sum benefit exists as a benefit option; 2) that the pre-retirement lump sum benefit can be divided in a divorce; and 3) what language the plan needs to properly make the division, if allowed. The information provided here is based on Markham Law Firm’s experience in dealing with pension plans and the majority of plans encountered. If you have a pension in your case and you want help to determine the benefits available and division types allowed by the plan, give us a call at 240-396-4373 or email us at: qdro@markhamlegal.com.
In addition, each state has its own laws regarding the division of property. It is important to consult with an attorney licensed in your state regarding the division of property and how pensions and their benefits are treated in your state.
Considerations in Dividing Defined Contribution Accounts
“Earnings, gains, and losses” and “market fluctuations” are two phrases used to describe the investment experience of the funds within a defined contribution account (401k, 403b, 457, TSP, etc.). In dividing a defined contribution account pursuant to a domestic relations order, the parties usually have the option of including earnings, gains, and losses on the amount to be transferred, or not. If these will be included, then the parties must select a valuation date from which to apply the earnings gains and losses.
What is the valuation date?
The date that the former spouse’s benefit will be valued. No contributions from any source (employee or employer) can affect the former spouse’s benefit after that date.
Why include earnings, gains, and loses on a transfer amount through a domestic relations order?
Division of the earnings, gains, and losses protects against surprises in the market.
Let’s say Spouse A is to receive 50% of Spouse B’s old 401k as of December 31, 2021, with earnings, gains, and losses applied thereon (Spouse B and the employer are no longer contributing to the 401k). At the time, $100,000 was in the account. Due to market fluctuations, at the time the account was to be divided, only $80,000 was in the account. Therefore, each party received $40,000 upon division.
Assume the same facts as above, but this time with no earnings, gains, and losses applied. Spouse A will receive $50,000 and Spouse B will retain $30,000.
Continue to assume the same facts, but this time due to market fluctuations only $40,000 remained in the account at the time it was to be divided. Without earnings, gains, and losses Spouse A would receive all $40,000 (even though Spouse A should have received $50,000) and the plan will consider its obligation satisfied. Spouse B would have $0 left in their retirement account and owe Spouse Ten Thousand Dollars.
Why would people not include the earnings, gains, and losses?
Sometimes the retirement account is the only cash source large enough to fund a buy-out of a non-liquid asset, such as the marital home. Both parties want the transfer to occur quickly, and they cooperate to minimize the time between the agreement being made and the transfer ultimately occurring. While the market can still have dramatic changes in short periods of time, the chances of dramatic changes are at least decreased the quicker the domestic relations order is created and processed.
Alternatively, the account-owning spouse may have a job that allows them to more quickly accrue retirement assets through things like employer matching contributions. Therefore, the account-owning spouse may want to ensure they are transferring a substantial amount of funds to their former spouse for their former spouse’s retirement savings ability.
How is the amount of earnings, gains, and losses determined?
In short, by a calculation by the plan administrator. The plan administrator will divide the transfer amount proportionally between all investments within the account as of the valuation date, and then trace those specific funds through to the date of transfer.
Most plan administrators require that this tracing be done proportionally through the account, as in, the domestic relations order generally cannot specify that the former spouse will receive a certain amount of each investment within the account. Some plans allow for this specification, but it is extremely rare so it should not be assumed as an option.
What if multiple accounts are being equalized?
The only earnings, gains, and losses that will be considered are the ones in the account being divided. So if each party has multiple retirement accounts, but it ends up that Spouse A needs to transfer $25,000 to Spouse B so the marital portion of their retirement accounts is equalized, if Spouse A makes a transfer out of one account, only that account’s market experience will impact the transfer amount. If Spouse B’s accounts have good investments, it will not decrease the amount being transferred to Spouse B from Spouse A. Similarly, if a different one of Spouse A’s accounts does poorly, it will not decrease the amount being transferred.
The best way to view the retirement accounts is that they are each completely separate from the other retirement accounts, even if they might be held by the same financial institution or earned from employment with the same employer.
If the parties invest their retirement account completely differently, such that one is very risky while the other is very conservative, it might be worth considering if multiple orders would better serve the parties’ intent in their agreement.
If you need a QDRO prepared or have questions about specific to this QDRO topic, please contact our office at 240-396-4373 or contact us via this form to discuss what your specific case might need.
Posthumous QDRO – Is it Allowed?
The scenario is easy to picture, parties are divorced and a QDRO is needed to divide the participant’s account. They don’t do the QDRO right away, and the alternate payee thinks about their benefit upon hearing the news that the participant died. Can they still get that benefit, or are they out of luck?
The answer hinges on two major case-specific facts, what retirement plan should have been divided, and where did the divorce happen?
The retirement plan in question is important because the first question to ask is whether the plan is governed by the Employee Retirement Income Security Act (“ERISA”). If it is not, then they can more easily make up their own rules, and the attorney’s considerations are focused more on their state court’s willingness to accept a posthumous QDRO and the plan’s willingness to accept it. These will vary enormously in their procedures, so it is best to assume that each plan is different and to do fresh research any time this might come up.
The jurisdiction of the divorce is important because ERISA is a federal law. The circuits are clashing as to whether they will enforce posthumous QDROs and if so, for how long after the participants death. The circuit positions are described below. There are a few circuits that have not yet weighed in on the issue, attorneys practicing in those areas will have to check and see if their state has any precedent.
Minority Opinion
The First and Fourth Circuits are in the minority by rejecting posthumous QDROs. Their argument is based on the plan’s future stability and need to know the benefits payable with respect to each participant as of the date of the participant’s death. Posthumous QDROs may require a plan to pay benefit greater than those actuarily available to the participant and the participant’s survivors, which would be a violation of ERISA and threaten the viability of the plan in the long term.
The First Circuit’s opinion on the issue is per curiam, and it simply refused to enforce a posthumous QDRO due to its rejection by the plan. The First Circuit specifically states that the decision does not determine the question if it would enforce an otherwise proper posthumous QDRO. Garcia-Tatupu v. Bell, 747 Fed. Appx. 873 (2019), affirming lower court decision Garcia-Tatupu v. Bell, 296 F. Supp. 3d, 407 (D. Mass, 2017).
The Fourth Circuit’s opinion is specifically about survivor benefits for a pension plan, noting that surviving spouse benefits vest in the participant’s surviving spouse on the date of the participant’s retirement. Part of this is for plan administration, in that the plan must calculate the participant’s payment on an actuarial basis, therefore it needs to know the identity and life expectancy of the surviving spouse when they begin to make payments. Hopkins v AT&T Global Info. Solutions Co., 105 F.3d 153 (1997). While the benefit in question is the surviving spouse benefit, this is what is described as the “post-retirement survivor benefit” in most divorces, and in plans governed by ERISA may be transferred to the former spouse (from a future surviving spouse) via a QDRO.
Majority Opinion
The Second, Third, Fifth, Ninth, and Tenth Circuits allow for posthumous QDROs, arguing largely that it will not be rejected simply because of the time it was issued, although there is some difference within the circuits there. Specifically, some of these circuits take a view that within the eighteen-month period prescribed by ERISA to review a QDRO and segregate the alternate payee’s benefit any QDRO is timely. Patton v. Denver Post Corp., 326 F.3d 1148, 1151 (2003). Patton states that this is because ERISA clearly allows for revised QDROs to be submitted within the eighteen-month period, so too can new Orders be accepted because payments during the period can be retroactive.
In this Tenth Circuit opinion, Patton also makes clear that no notice to the Plan would be required prior to the participant’s death – whether by notice of divorce, marriage, or otherwise.
Alternatively, they state that because a QDRO is the key to enforcing an otherwise valid interest in a retirement plan, “there is no conceptual reason why a QDRO must be obtained before the plan participant’s benefits become payable on account of his retirement or death.” Trs. of the Dirs. Guild of America-Producer Pension Benefits Plans v. Tise, 234 F.3d 415, 421 (2000).
Circuits yet to opine on the issue: Six, Seven, Eleven, and Twelve
The cases discussed herein are largely with respect to pension plans and survivor benefits. The reason for this is simple – when the retirement asset at issue is a defined contribution plan (ie: 401k, 403b, TSP, etc.) the plan will make a payment to the beneficiary upon receiving notice of the participant’s death. At such time, the plan has no additional funds available to pay to an alternate payee should the plan receive a QDRO after such payment is made. Therefore, any enforcement action by the alternate payee would more properly be directed at the beneficiary rather than the plan.
Note: some cases cited may not be published opinions but are provided for information and research purposes.
If you need a QDRO prepared or have questions about specific to this QDRO topic, please contact our office at 240-396-4373 to discuss what your specific case might need.
When a Reduction to the Former Spouse’s Payment is Required by the Plan
Certain plans, such as the Interamerican Development Bank and the International Monetary Fund limit the amount of the participant’s pension that can be given to a former spouse or otherwise reduced. Other reductions might come from providing a survivor benefit to a former or current spouse.
Specifically, a participant must receive at least 50% of their unreduced pension benefit upon retirement with these two plans. Since both of these plans require a reduction to provide a survivor benefit, this means that a participant cannot give a former spouse both 50% of the pension benefit and ANY survivor benefit.
This requires a certain amount of math to figure out what can be provided to the former spouse and still provide the participant their minimum required benefit. This is not something attorneys can do for their clients, unfortunately. However, a willing participant could work with the HR department to run various scenarios for the parties to discuss.
In a negotiation or trial on the matter, obtaining this information requires some advance planning to avoid delays. If you’re dealing with one of these or a similar plan, call us at 240-396-4373 to discuss any questions you may have.
Cost of Living Adjustments and Military Pensions
Earlier this year the Appellate Court of Maryland (formerly the Court of Special Appeals of Maryland) heard the case Martinez v. Lopez, No. 835-2021 (April 7, 2023). The issues addressed pertained entirely to an award to the Wife of the Husband’s military pension benefits. While some of the holdings are reiterations from other cases, others are new and help clarify how to treat these pensions.
The 10/10 Rule is only a limitation for the former spouse to receive benefits directly from DFAS. What is the 10/10 rule? The parties must be married for 10 years, during which the member serves 10 years in the military, qualifying for retirement credit. In this case, the parties were married for a little over 5 years, so this requirement has not been met. It is important to remember that this limit does not impact state law and the divisibility of marital property. It only prohibits the former spouse from receiving the benefits directly from DFAS – meaning that the member must pay the former spouse directly each month for the spouse to receive the benefit.
An award of a Survivor Benefit to the former spouse is entirely within the Court’s discretion in Maryland. Check your state’s laws to see if the survivor benefit is treated as a part of the pension or as a separate asset. If your state treats it as a separate asset, be sure to discuss it separately in any agreement and request it separately in any pleading.
The adjustment of a direct payment of retirement benefits for tax purposes is within the court’s discretion. When the member receives their military pension payment, it is taxable income to the member. A payment after that made directly to the former spouse from the member would necessarily be made post-tax. A party can request that the direct payment amount be adjusted since the member is paying the income tax for the former spouse in this scenario. However, this case confirms that such an adjustment is at the discretion of the court to award.
Cost-of-Living Adjustments are automatically applied in payments to a former spouse when the payment comes from DFAS. It is not necessarily the case in direct payments. The Court discusses a Department of Defense Financial Management Regulation that states in a case where the National Defense Authorization Act for Fiscal year 2017 is applicable (i.e.: divorce of most military members occurring after December 23, 2016), COLAs will be applied to the benefit paid to the former spouse, regardless of what is stated in the court order. However, if benefits are being paid directly from the service member to the former spouse, the court has discretion whether to award COLAs on such payment amount and, if so, how they would be measured. In Maryland, the person seeking the marital property is burdened to evidence its value. According to Martinez v. Lopez, such analysis is important when seeking COLAs on a direct payment of these pension benefits.
Additionally, the court was asked whether it is within the trial court’s discretion to make one party solely responsible for the costs to prepare a domestic relations order to divide the retirement asset. It was determined the issue in this matter was moot, so it was not addressed. However, this author hopes there will be an answer one day.
Please call us at 240-396-4373 or click here to contact us if you have a divorce matter involving a military pension.
Retirement Accounts as a Source of Support Payments – Tax Considerations
We’ve all had cases where one party owes child support or alimony arrears but does not have the cash in the bank to make the lump sum payment nor the income available to make substantial payments toward those arrears.
Defined contribution plans, such as 401k, 403b, etc. that ERISA governs can be used as a source to pay these arrears in a lump sum. The retirement plan must receive a QDRO stating the amount to be paid and the purpose of the payment.
The QDRO needs to state the purpose of the payment because it will impact who is responsible for the tax payment on the funds. Specifically, if the payment is to pay child support arrears, the account holder will be responsible for the tax on the funds. This is because child support is usually paid with after-tax funds earned through normal employment income. Therefore, the account holder will maintain the responsibility of paying the tax on the funds if they are paid via QDRO.
With respect to alimony arrears, the agreement or judgment of divorce is an essential document. Before the 2017 change to the tax laws, tax payment on alimony could be shifted to the alimony recipient or remain with the payor. The QDRO would have to state the tax responsibility for any agreement entered into prior to 2017 concerning alimony arrears to ensure the tax responsibility remained the same. Currently, the law states that the payor is responsible for the tax on alimony. However, the tax law is scheduled to sunset in 2025, so the ability to shift the tax will return unless Congress decides to extend the life of this law.
Any QDRO preparer, and attorney negotiating this issue, will need to pay attention to the date the agreement is made to properly allocate the tax on alimony arrears paid from a retirement account.
If you need a QDRO prepared for the payment of support arrears, please contact our office at 240-396-4373 to discuss what your specific case might need.
Looking for more information? Search our prior blog posts by topic below or using search bar below: